Don’t be embarrassed. If you’ve waited this long to contribute to or top up your registered retirement savings plan for the 2013 tax year, you’re not alone. Most Canadians don’t save on a regular basis. Even successful professionals and business people can forget, between meetings and travel and too-rare conversations with their spouses, to pay themselves first.
Your first step, if you don’t know already, is to determine how much you can and should save. Look at last year’s notice of assessment from the Canada Revenue Agency. It states how much you’re allowed to contribute this year—18% of your previous year’s income, up to a maximum of $23,820—and how much room you’ve accumulated over your working life. If you haven’t maxed out your savings in past years, then you’re allowed to contribute more. The unused contribution room is carried forward each year. (If you over-contribute, Canada Revenue Agency will slap you with a 1% fine per month on every dollar that exceeds your lifetime limit.)
But how much should you invest? Daniel Laverdière, a senior manager of financial planning and advisory services at National Bank, says that, if you can, contribute the maximum amount. That 18% limit was created to provide people with 70% of their previous earnings in retirement—an old rule of thumb that’s still worth following.
Of course, if you know you’ll have other sources of income in your old age—for example, if you have a pension plan at work—then maxing out your RRSP isn’t required.
Even last-minute contributions should be made with an eye to asset allocation. A typical RRSP portfolio is split into 60% equities and 40% fixed income, but that will vary depending on your risk tolerance and time horizon, says Jon Palfrey, a portfolio manager with Leith Wheeler Investments. Those less than five years from retirement should be around 60% in bonds and 40% in stocks. Between five and 10 years, consider a 50-50 balance.
Further, diversification demands a geographical mix in the equity portion. Assuming you’ll be spending your retirement in Canada, Canadian stocks carry no currency risk. But as choices in Canada are limited, domestic holdings should be balanced with U.S., European, Japanese and emerging-market stocks. Here are a few specific investments to consider:
HiSAs and GICs
Any portfolio might contain a cash component from time to time. It’s a place to stow money temporarily, say, when there’s a high risk of a market correction (which savvy investors see as a buying opportunity). What a high-interest savings account (HISA) or guaranteed investment certificate won’t do these days is provide you much of a return—1% if you’re lucky. A 30-day GIC will pay about a quarter of a percentage point more than a redeemable one, if you can wait.
Beutel Goodman Canadian Equity Fund
For the Canadian equity portion of your RRSP, this fund has earned a five-star gold rating from Morningstar, the highest rating possible. It’s ideal for an RRSP since its after-tax returns aren’t as good as its pre-tax returns, says Christopher Davis, director of fund analysis at Morningstar Canada. The fund has great managers with a strong strategy, says Davis. “They buy at a large discount and have a rigorous sell discipline.”
Within your fixed-income allocation, consider this five-star fund. Its manager, Michael Hasenstab, won Morningstar’s 2013 crown for fixed income manager of the year. He has a team of global analysts and years of experience behind him, says Davis. The fund has a 44% weighting to government bonds, but be careful, much of that is in higher-yielding emerging market issues, so this is a riskier bond fund than most.
BMO Equal Weight REITs Index ETF (TSX: ZRE)
Real estate income trusts work well in an RRSP because their distributions are otherwise taxable. Davis recommends this ETF, which is not heavily weighted to any one name and pays a 6.1% yield. Keep in mind REIT valuations could be hurt by future rises in interest rates. Still, it’s hard to beat this payout.
BMO Aggregate Bond Index ETF (TSX: ZAG)
This fixed income ETF offers broad exposure to the Canadian bond market. While it’s weighted to government bonds, it owns corporates too, says Davis. He points out that 45% of its holdings mature in one to five years, making it less rate-sensitive than its peers. It has a 2.45% weighted average yield to maturity.
Canadian Imperial Bank of Commerce (TSX: CM)
It’s the smallest (and cheapest) of the Big Five banks, but Garey Aitken, manager of the Franklin Bissett Canadian Equity Fund, says it’s the perfect RRSP pick. It has an attractive 4.4% yield and should see modest growth and share buybacks in the future.
Canadian National Railway (TSX: CNR)
If you’re looking for something to hold for the long term, there are few Canadian stocks with a longer track record. With what Aitken says is excellent management, it should keep growing revenues for decades to come. “I’d expect to see fairly meaningful capital appreciation over time,” he says.
Alimentation Couche-Tard (TSX: ATD.B)
More growth-oriented investors should look at this Laval, Que.–based convenience store operator. It’s known for its acquisitions such as its 2012 purchase of Statoil’s convenience chain. Bruce Campbell, president of Stone-Castle Investment Management, expects 5% to 10% earnings growth a year, which should translate into good capital gains.